Japanese land prices climb for second year

Published March 25, 2008

Japanese land prices climb for second year

But growth in values may dip as financing shrinks with sub-prime woes


(TOKYO) Land prices in Japan rose for a second year in 2007 after a 15-year slump, as private funds and real estate investment trusts competed to acquire properties in the country's largest cities.

Prices increased 1.7 per cent on average after climbing 0.4 per cent a year earlier, the Ministry of Land, Infrastructure and Transport said in Tokyo yesterday. Average commercial land advanced 3.8 per cent from 2.3 per cent in 2006, and residential land rose 1.3 per cent from 0.1 per cent.

Commercial land values are still less than a third of what they were at the height of Japan's bubble economy in 1991, while home land prices stand at half the peak.

Growth in values may slow as US$195 billion of losses and writedowns related to the US sub-prime mortgage collapse makes it more difficult for lenders worldwide to finance real estate purchases.

'Uncertainties in Japan's real estate market are increasing,' said Hiromichi Iwasa, president of Mitsui Fudosan Co, Japan's biggest developer, and head of the Real Estate Companies Association. 'Commercial land prices have started showing signs of a slowdown and the residential market is entering an adjustment phrase in central city areas.'

Commercial land prices increased 10 per cent on average last year in the Tokyo, Osaka and Nagoya regions, while residential land value in Japan's three largest urban areas climbed 4.3 per cent, the ministry said.

The prospect of an end to Japan's property-price deflation attracted Morgan Stanley to invest more than 2 trillion yen (S$27.7 billion) in real estate since the late 1990s. In April 2007, Morgan Stanley bought 13 hotels from All Nippon Airways Co for 281 billion yen, the nation's largest real estate acquisition.

Japanese real estate investment trusts purchased 1.46 trillion yen in property in 2007, a 26 per cent increase from a year earlier, according to STB Research Institute Co. Assets in private real estate funds rose 61 per cent to 9.8 trillion yen.

Land prices in Tokyo may resume falling this year as the sub-prime crisis reduces investment from abroad, according to Akiyoshi Inoue, president of Sanyu System Research Institute, an independent appraisal company.

'We should be prepared for another round of real estate deflation that may last for some time,' Mr Inoue said.

The boom has already started to cool. Growth in residential land prices in Tokyo's 23 central districts slowed to 10 per cent in 2007 from 11 per cent a year earlier. In Osaka's six wards, residential land rose 4.4 per cent last year, slowing from 5.5 per cent in 2006, and growth in commercial values also waned.

Lone Star Funds, the Dallas-based buyout firm, cancelled plans to sell more than 50 Japanese hotels because it could not get its asking price of as much as 170 billion yen, two people familiar with the proposals said on March 11.

Higher condominium prices together with stagnant wages are sapping demand for residential property. Average wages fell in 2007 and condo prices increased as developers limited supply and passed record steel and copper costs to home buyers.

'Home prices are likely to drop within several months due to an oversupply of condominiums and declining affordability for households,' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. 'It's natural to see a drop in demand.'

Consumer confidence is at a five-year low. Household assets fell for the first time in five years last quarter as shares slumped, a Bank of Japan report showed last week. The Topix index of stocks has tumbled 17 per cent this year after a 12 per cent drop in 2007.

A change in building regulations may also be curtailing gains in residential land prices, according to Mr Sato.

The government's introduction of stricter building-permit rules last June produced a logjam in applications that 'deteriorated the cash position of condo developers', making them less able to pay higher prices for new sites, Mr Sato said.

Housing investment plunged 9.1 per cent last quarter. Housing starts have since begun to recover, falling 5.7 per cent in January compared with 44 per cent in September.

Ginza, a Tokyo shopping district, had the most expensive commercial space in Japan for a second year, surging 28 per cent to 39 million yen a square metre, yesterday's report showed.

Gobancho, in Tokyo's Chiyoda district, was the costliest residential area for the 12th year, with land climbing 16 per cent to 3.37 million yen a square metre. -- Bloomberg

Published March 25, 2008

Slow Japan condo sales won't hit ratings: Fitch

Property giants' core leasing business will cushion impact


(TOKYO/SINGAPORE) Fitch Ratings has said in a special report issued yesterday that its ratings of Japan's major real estate companies are unlikely to be affected by a slowing condominium market.

The Tokyo office leasing market continues to perform strongly, with a historically low vacancy rate and steadily rising rents.

'Not only do the Japanese real estate majors have limited exposure to the slowing residential market, but any negative impact is mitigated by the robust performance of their core leasing business, and the large scale of their operations which allow for a good level of revenue diversification,' says Satoru Aoyama, director in Fitch's Asia-Pacific Corporate team.

The Tokyo office leasing market continues to perform strongly, with a historically low vacancy rate and steadily rising rents.

The real estate majors - Mitsubishi Estate Company, Ltd ('A'/Stable), Mitsui Fudosan Co Ltd. (A minus)/Stable/'F2') and Sumitomo Realty & Development Co Ltd. (BBB minus)/Stable/'F3') - with their quality leasing portfolios in central Tokyo, should continue to benefit from this positive leasing environment.

They also maintain a highly competitive brand in the residential market - their sales businesses focus largely on condominium developments in Japan's main urban centres, where demand remains persistently strong and property prices are rapidly rising.

This demand could potentially offset the negative impact from a cyclical downturn in the residential market.

Moreover, the high quality of the three majors' leasing properties and of their new projects support continued inflow of new capital - partly shifting from a more speculative class of assets, that is, lower-quality properties - and their funding conditions appear better than ever despite the current instability in the capital market.

However for smaller and financially weaker property companies and developers, the business environment is much tougher than that for the three majors.

Following years of strong performance, supplies of new condominiums in Tokyo has been falling since 2006, driven by rapidly rising property prices and persistent deflationary pressures on the consumer side, which combined are causing a decline in consumer demand.

Moreover, the rising property prices suggest that in both the residential and office markets, more capital would be required to support new development projects. Across the sector, rising development costs have already put the sales business' profit margin under pressure, while the larger capital required for the increased development costs may force financially weaker companies out of business.

The credit trend in the Japanese real estate market is a marked polarisation in terms of operating results, financial improvements, and credit quality.

'Japanese Real Estate Majors - Limited Impact from Residential Slowdown' is available on the rating agency's website www.fitchratings.com. -- Reuters